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Question

What is a commercial bank? Explain various types of accounts with commercial banks. 

OR 

What is central bank? Explain any three quantitative measures to control the money supply in the market. 
 


Solution

Commercial bank is defined as an organisation that accepts deposits and uses the deposited money to lend or invest it by the general public. Various types of accounts are: 

(a) Current Account Deposits: These are the deposits which can be withdrawn by the depositor at any time by means of cheque. These deposits are made by businessman and industrialists who use these deposits for making business payment. The account in which the money is deposited is known as Current Account. No interest is paid on these accounts by the bank. 

(b) Savings Account: Savings account or deposit is usually held by households. It provides chequable facility to the customers. There are restrictions on the number of withdrawals and interest is paid by the bank. 

(c) Fixed Deposits/Time Deposits: These are the deposits which can be withdrawn only after the passing of a certain time period. These deposits carry the highest rate of interest. These are not considered demand deposits which are payable on demand and don't carry cheque facility. 

OR 

Central bank is the apex institution of a country which controls, supervise, regulate and organize the financial and monetary system of a country. Three quantitative measures are: 

(a) Bank Rate Policy: It is the rate at which central bank lends money to the commercial bank. There is a direct relationship between bank rate and interest rate. When the bank rate increases, interest rate also increases. This affects the lending capacity of the commercial banks and thus reduces the money supply. 

(b) Cash Reserve Ratio: The fixed percentage or proportion of total deposits which is to be kept with RBI by commercial banks as cash is known as CRR. When credit is to be decreased, central bank can increase this ratio so as to reduce the lending power of banks and when it intends to expand the credit, it reduces the ratio. 

(c) Statutory Liquidity Ratio (SLR): A certain percentage or proportion of the bank's total deposits must be in the form of liquid assets like gold or cash. It is known as SLR. In order to expand credit, this ratio is required to be reduced but to reduce the credit; SLR must be increased. 


Economics

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